As part of their financial planning and risk-management practices, business owners should regularly take stock of their insurance to ensure that they have the right types and amounts of coverage.
In doing so, business owners should be cognizant of trends in the insurance market that are reasonably expected to impact the business.
One current trend to watch out for, one that is probably hard to ignore, is the rising cost of premiums. While individuals generally expect insurance premiums to rise as a result of filing claims, this is not the only factor that causes premiums to increase. Market forces, outside of the control of policyholders, can also drive up the price of premiums.
Some market forces, such as inflation, are currently affecting premium rates across all sectors. Individual sectors also are seeing increases due to factors unique to them. For instance, property insurance premiums are increasing, in part, because of the rising cost of raw materials, like lumber, supply chain disruptions, and losses caused by recent natural disasters, such as hurricanes, tornados, wildfires, and tropical storms. Another factor affecting premium rates is the rising cost of litigation and jury verdicts awarding higher amounts of damages. The insurance industry calls this "social inflation."
In some regions, these factors are not only driving up premiums but also affecting insurance availability altogether. In California, for example, All State and State Farm are no longer accepting applications for property or casualty insurance because of inflation, increasing catastrophe exposure, and a challenging reinsurance market. In Florida, Farmers Insurance and AAA have made similar decisions, citing risk management and a challenging market as causes.
When insurance premiums rise, insurance companies become more selective about what types of liability they will accept. This is called a "hard market." In a hard market, insurance companies re-evaluate their lines of coverage and the amount of risk they are willing to take. This leads to fewer carriers offering coverage and lower limits for those that do underwrite policies. In other words, coverage options become limited, and the cost of coverage increases.
The cyber insurance market has experienced some of the greatest increases in premiums, due to high claim costs, the expansion of online commerce, and the increasing frequency and severity of cyberattacks.
Directors and officers insurance also experienced substantial premium increases in 2022 and/or 2023, due to an increase in mergers, class action lawsuits, and the cost of regulatory investigations.
Other types of insurance that have been affected by the rising costs of premiums are:
- Employment practices liability insurance—the pandemic resulted in mass layoffs and other potential discrimination cases, which led to an increase in litigation.
- Business interruption insurance—this coverage can replace lost income when your business is damaged during a fire or natural disaster. However, insurers are tightening up exclusions due to lawsuits over closures that occurred due to the pandemic.
- Product liability insurance—this coverage can protect a business from losses if a product manufactured or sold by the business injures a person or property.
- Product recall insurance—this coverage can protect a business from losses if a product has to be removed from the market.
- Umbrella insurance—this insurance extends the limits of ALL other policies a business has.
As businesses set their annual budgets and evaluate their insurance needs, the impact of rising premiums must be considered. Its most immediate and direct effect is on a business' cash flow. This is prompting some business owners to explore creative solutions and alternative forms of insurance, such as self-insurance and captive insurance. Any way you slice it, having proper insurance coverage can be the determining factor that allows a business to survive when disaster strikes.
Ward and Smith's Insurance Counseling and Recovery Team can help your business assess and strategize its insurance needs.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.